A Hard Conversation

This is the final part of three+one’s Summer Blog Series . As there are five Tuesdays in August, I will be addressing the top five questions the nation’s public and Higher Ed financial officers ask me as I travel across the country. Today’s question: “Which is better when paying for bank services, hard fees or soft fees?”

Over the last two years you have read our comments on the changing landscape of banking. As we’ve pointed out, the changes are primarily driven by new federal regulations and the need for greater transparency in banking services.

A Hard Conversation

In today’s world of public banking, the practice of using bank deposits to cover the cost of banking services has come under far greater scrutiny.

More and more, we’re seeing soft charges for banking services—through the use of bank deposits and the Earnings Credit Rate (ECR)— being replaced with actual hard fees.

At first blush, even the mention of hard fees may be unacceptable to you. But, after a closer look, the practice can produce a significant rise in net income to an entity like yours.

As a case in point, an entity with monthly bank fees of $1,000 coupled with $10 million in deposits would have a far more positive financial outcome if hard fees were charged vs. soft ones.

The use of soft fees, coupled with an ECR of .20 basis points, will earn a net income of $20,000 versus a hard fee of $12,000 coupled with deposits earning .60 basis points. Such an arrangement will produce net earnings of $48,000—a difference of +300%! The bank charges are transparent and can be deducted against the earnings of the deposits.

My advice is to talk to your banker(s) and do the calculations. First start with your bank analysis statements and compare them against the potential you can earn on deposits out in the marketplace. On average, a Bank Deposit Investment Account (BDIA) can earn between .60 to 1.10%+. Combine that with other bank deposit savings accounts and state pool funds, if available, and you could see minimum income earnings of .60 basis points on your cash. Best of all, this can be done while still meeting all your regulatory, legal, safety, and liquidity requirements.

The more money you add to your bottom line, the less financial stress on your entity, your community—and you. In the end, having this fee discussion with your banker may turn out to not be “a hard conversation” at all.

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We Hope to See You at our Upcoming Presentation:

GFOA of SC – October 16 – 19
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To RFP, or not to RFP…

To RFP, or not to RFP...

This is the fourth part of three+one’s Summer Blog Series . As there are five Tuesdays in August, I will be addressing the top five questions the nation’s public and Higher Ed financial officers ask me as I travel across the country. Today’s question: “In today’s banking environment, does it still make sense to issue banking RFPs?”

Over the last two months I have seen dozens of public entities, nationwide, conduct banking depository/treasury-service RFPs.

Based on the type of RFP that was issued, the results I’ve seen have been mixed.

One thing is sure: recycling banking RFPs that were issued five-to-ten years ago got little response.

Those that were forward thinking, willing to integrate new technology, coupled with the desire to negotiate services and/or deposit levels, had far greater success.

I have seen some entities receive one or two responses while others got as many as six to eight.

The ones that were more progressive and used “out-of-the-box” thinking got better results from the larger national banks. Those RFPs that were more structured and “cookie cutter” in approach only got responses from smaller local banks.

Here are a few words of advice from what I’ve heard on the street:

1.) First, have a conversation with your current banker(s). Changing banks is a lot of work. If it is due to the quality of their customer service, let your bank know. If they’re not listening, then a RFP is totally warranted.

If you have no plans in changing banks, please save everyone’s time—including your own—and forget issuing an RFP. Time is a valuable commodity and your credibility will be lost in future RFP efforts if the outcome is predictable.

 

2.) If you are currently receiving a earning credit rate of .50 basis points or higher, then hold off too. The chances of getting the same rate will be at risk. Wait until short-term interest rates are higher; that’s most likely over the next two years.

3.) If you choose to conduct an RFP, don’t resort to the ”same old“ template. If you do that you will get “same old” back. A good RFP takes time, homework, and conversations with experts in the field.

Some banks want deposits, others don’t. Larger national banks have treasury services while smaller community banks have the flexibility to team up with third-party providers.

4.) Consider the pros and cons of ”hard“ banking fees and ”soft“ fees. While telling your boards or legislators that you’re pay no bank fees, the cost of soft fees could be far more expensive and less transparent than hard fees over the long haul. (That will be the focal point of next week’s blog).

5.) Keep your bank responses to under 25 pages. Conversations with bankers are far more valuable than “boiler-plate” written responses.

Finally, if you don’t know where to start, call three+one. We have conducted banking RFPs across the country and know the banking marketplace well. You will find our help and guidance can save you a lot of time and money.

Stay tuned for next week when we continue our three+one Summer Series where we answer the question:  “Which is better when paying for bank services, hard fees or soft fees?”

Safety, Liquidity, and Yield- Really!

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Have you seen we have a new web address? Our website is now live at threeplusone.us! Our emails have changed too!

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This is the third part of three+one’s Summer Blog Series . As there are five Tuesdays in August, I will be addressing the top five questions the nation’s public and Higher Ed financial officers ask me as I travel across the country. Today’s question: “Are there opportunities to earn income on my operating cash while still staying safe and liquid?”

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Believe it: Short-term interest rates will go up by year-end! And I mean 2016!

Safety, Liquidity, and Yield- Really!

Given the stronger economic conditions in the U.S. and the surprising lack of the Brexit fallout (despite what the press would have you believe), I see short-term rates increasing by 25 basis points, mirroring the actions taken by the Federal Reserve in 2015.

Does that mean you will earn more on your short-term cash deposits? That depends on whether you’re proactive or passive in managing your cash deposits.

Either way, as a fiduciary of other people’s money, you need to make sure that you keep the funds safe and liquid—while also determining the value of your deposits in the marketplace.

The number one question I hear as I travel across the country is “Are banks going to pay more on deposit accounts?”

No pun intended, my standard answer is “Don’t bank on it.” Please understand that this is not the fault of the banks, it is a matter of their playing “catch-up,” having weathered the low-interest-rate environment of the past eight years. Lending rates will go up, but catching up on deposit rates will likely take from three to six months.

You may ask, “Is there an alternative to bank savings and deposit accounts?”

Yes there is. And it’s one that will enable you to be safe, liquid, and deliver a higher interest rate on your cash.

The solution is to look outside of the “norm”, and look into a Bank Deposit Investment Account (BDIA). Instead of a traditional savings or money market account, a BDIA lets your bank serve as a custodian for direct investments in fixed income, managed by a nationally recognized Registered Investment Advisor (RIA).

A BDIA lets you still use a bank to provide the safety of your underlying dollars, while allowing your RIA to create an investment portfolio that takes advantage of any rate increases. The difference between a standard bank deposit account and a BDIA can be anywhere between 20 to 70 basis points.

Why wait for the Fed to take action? The ability to see an increase in your interest earnings can start today.

Being proactive—taking advantage of three+one’s proprietary liquidity analysis and the help of an RIA—will provide a new source of income by the end of 2016. And you’ll likely see even more growth in 2017 as short-term interest rates are projected to continue rising.

Stay tuned for next week when we continue our three+one Summer Series where we answer the question: “Which is better when paying for bank services, hard fees or soft fees?”

Why Don’t Banks Want My Deposits?

This is the second part of three+one’s Summer Blog Series . As there are five Tuesdays in August, I will be addressing the top five questions the nation’s public and Higher Ed financial officers ask me as I travel across the country. Today’s question: “Why are banks no longer interested in my deposits?”

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A couple of months ago I received a call from a town treasurer asking if I knew of a bank that would take their $10 million in deposits. I called two national banks, two regional banks, and three community banks. Not one of these banks wanted the deposit.

Why wouldn’t a bank want public deposits?

Why Don't Banks Want My Deposits?

Starting last January, all public “non-operating” deposits went from welcome assets to huge, unwanted liabilities, thanks to the new Liquidity Coverage Ratio (LCR) established by the Dodd-Frank Wall Street Reform Act of 2010.

For banks with assets of over $50 billion, the LCR requires a double-digit capital “set aside” on all non-operating deposits; it will reach even higher levels by the end of 2018. Couple that with required government collateral obligations and it’s easy to see why public fund deposits are now hurting banking relationships. One banker told me that non-operating funds are a 30%+ loss leader to their bank’s bottom line. For community banks, a general rule of thumb is to limit public deposits to just 10% of their total balance sheet exposure.

So here’s what you need to know:

Why Don't Banks Want My Deposits?

Operating funds—those used for day-to-day cash flow needs (e.g., payroll, benefits, vendor payments, debt payments, etc.)—are considered “sticky” dollars by Fed standards and are not levied an LCR rate. These deposits are appealing to banks of all sizes when coupled with bank transaction services (e.g., electronic payments, purchasing cards, virtual payments, etc.) as they generate fee income.

For non-operating funds—those that are considered on the sidelines and held for reserve—banks now must apply an LCR to them. In many cases, banks are no longer interested in holding such funds but, if they do, they’re going to pay a low deposit rate on savings or money-market accounts.

Your best alternative solution is a Bank Deposit Investment Account (BDIA). It’s a bank custodial account managed either by your bank’s trust department or by a Registered Investment Advisor (RIA) who specializes in such accounts.

My advice: have a conversation with your banker(s) today. Despite the changed landscape of banking due to tougher federal regulations, they’ll want to work out a solution that works for all concerned.

Stay tuned for next week when we continue our three+one Summer Series where we answer the question: “Are there opportunities to earn income on my operating cash while still staying safe and liquid?”

Online Banking – Will My Bank Costs Go Down?

This is the first part of three+one’s Summer Blog Series . As there are five Tuesdays in August, I will be addressing the top five questions the nation’s public and Higher Ed financial officers ask me as I travel across the country. Today’s question:

Given there are less bank branches and more efficient online banking services, how come my banking costs aren’t going down?
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Over the last several months, Pete and I have had the opportunity to speak at a number of finance-related conferences. At each one this question has come up: “Given fewer bank branches and greater advancement in technology, will my banks costs go down?”

The answer is both “yes” and “no.”

Online Banking - Will My Bank Costs Go Down?

First the “no.” Given the higher risk and increased compliance mandates established by the Dodd-Frank Wall Street Reform Act*, banks of all sizes have a batch of new costs to deal with.

While fewer bank branches and a reduced support staff do help, banks have had to add compliance personnel to meet new audit and “Know Your Client” demands. It will take a while for banks to fully adjust to the staggering costs of their new reality.

For the top-tier banks, the added costs of federal oversight are in the billions. Regional banks are seeing new costs in the millions. Even small community banks will be spending hundreds of thousands of dollars to fully comply.

Naturally, these costs are then passed on to their customers with higher checking/ATM fees and lending rates along with lower deposit rates.

Now for the “yes.” Bank fees will likely move downward as technology continues to advance thus making them more efficient. I also see banks benefiting from higher interest rate spreads—but all this could take four to five years.

*Already 22,000 pages thick and more are expected!

Stay tuned for next week when we continue our three+one Summer Series where we answer the question: “Why are banks no longer interested in my deposits?”

three+one Summer Blog Series

I am pleased to introduce three+one’s Summer Blog Series. As there are five Tuesdays in August, I will be addressing the top five questions the nation’s public and Higher Ed financial officers ask me as I travel across the country.

The five questions I’ll most likely be asked are:

  1. Given less bank branches and more efficient online banking services, how come my banking costs aren’t going down?

  2. Why are banks no longer interested in my deposits?

  3. Are there opportunities to earn income on my operating cash while still staying safe and liquid?

  4. Which is better when paying for bank services, hard fees or soft fees?

  5. In today’s banking environment, does it still make sense to issue banking RFPs?